Mother Nature
Necessitates Invention
And Technology Buoys Industry
by R. David Simpson
The United States remains competitive in world resource markets, despite
geological disadvantages and a relatively long history of depletion.
American ease with innovation helps explain why.
generation ago, some prognosticators warned that
A
Americans should brace themselves for an era of
scarcity. The natural resources we depended on for
food, clothing, shelter, and energy were dwindling,
they claimed. But after years of resource use, the
specter of scarcity remains just that. In fact, it has
faded somewhat. Natural resources are neither scarce
nor expensive and their price tags have declined—as
much as 40 percent in the past forty years.
Prices have declined because the costs of producing natural resources have dropped. Costs have
dropped because improvements in technology have
more than offset the effects of depletion. Technological
innovation, then, is something of a savior for
America’s consumers and natural resource producers,
helping to make the latter strong competitors on the
international market. Even copper mining is flourishing, though it seemed doomed as an American enterprise not long ago.
How exactly has technology controlled costs? With
support from the Alfred P. Sloan Foundation,
researchers at RFF have been exploring this question
as part of a study of productivity change in four U.S.
natural resource industries: coal mining, oil and gas
exploration, copper mining, and forestry. In conducting the research, we performed individual case studies
first and then a statistical analysis of productivity
trends in the four industries. Thus we took both
“bottom up” and “top down” approaches.
The record of productivity growth in U.S. natural
resource industries is mixed, and does not lend itself
to easy interpretation. Changes in market conditions
and regulation in the 1970s apparently had some
temporary negative effects on productivity.
Superimposed on these temporary phenomena may
be the effects of the gradual depletion of more easily
accessible reserves. There is, however, a long-run
trend working in the opposite direction: the introduction and adoption of improved production technologies have offset the effects of depletion. One can never
be sure that such a trend will continue. Our findings
published in Productivity Change in Natural Resource
Industries identify three factors that explain how and
why technology has kept natural resources relatively
cheap and plentiful in the United States, however, and
suggest that the same factors will continue to be
important in the future.
Origins of Innovation
First of all, necessity does appear to be the mother of
invention. Were it not for new technologies, extraction
costs would go up as the most accessible reserves
went down. The viability of companies or even whole
industries depends on continuing technological
progress.
Second, new inventions are rarely the results of
immaculate conceptions. If necessity is their mother,
then the general state of technology might be said to
be their father, determining the set of innovations
possible. Furthermore, breakthroughs come at the end
of what can be a long gestation period that often
involves cross-fertilization. New machinery and
processes are rarely truly novel, consisting rather of
recombinations of existing technologies.
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RESOURCES FOR THE FUTURE
Third, a nation’s legal, political, and social institutions play a crucial role in encouraging solutions to be
conceived in the first place and then husbanded
through to maturity. How well a society nurtures
invention makes a big difference in how much of it
occurs. The United States, for example, offers a much
more “innovation-friendly” environment than many of
its competitors.
Winnowing Waste
Perhaps the best example we found of necessity mothering invention is something called the solvent extraction-electrowinning (Sx-Ew) process in copper
mining. In the 1970s, U.S. mining companies had to
reduce costs if they were to survive competition from
foreign suppliers. Developing the Sx-Ew technology
was an important component of the latter strategy. It
enabled copper companies to “mine” the waste
streams from their earlier operations; now they could
extract enough copper from mine tailings to make
them viable ore sources.
Just how much American copper companies have
relied on the more intensive working of existing mines
is striking. Annual U.S. copper production increased
by more than 40 percent between the 1970s and
1990s. But new mines were few and only accounted
for some 3 percent of U.S. copper production in
1995.
Similarly, a dwindling supply of trees has driven
innovation in the forestry industry. Earlier improvements in harvesting technology made it possible to
eliminate large swathes of forest closest to centers of
population and industry. Once the most easily accessible forests were gone, setting out for increasingly rare
and inaccessible virgin forest was not an attractive
option. Not only are these remote areas costly to
harvest, they are increasingly in demand as preserves
for recreation and biodiversity conservation. Often it
has become more profitable to replant and manage
previously harvested areas instead. More and more,
trees are being grown on plantations and treated like
crops. They are being harvested in areas best suited
for forestry and not simply reproduced where they
stood in the past.
Increments and Complements
Among our case studies, use of three-dimensional
seismology in petroleum exploration and development
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Impacts on Innovation
Most people would agree that new types of
machines are innovations. But what about new
management practices? Government regulations?
Changes in labor relations? They, too, are agents
of transformation. Even when such developments
do not amount to what might be considered
innovations, however, they can have an impact on
productivity change. Sometimes they drive innovation more than depletion does. Competition is
one example.
probably best illustrates how incremental progress has
enhanced the applicability of a new technology. The
way in which the technique is used today likewise
shows how innovation depends on the technologies
generally available in the economy, as well as those
being employed in particular industries. The principles underlying 3D seismology have been known for
close to a century, but its practical application had to
await development of high-speed parallel computing.
Absent the ability to compile and interpret extremely
large amounts of data, the technique, which involves
the use of sound waves to map out the shape and
location of underground geological formations, was far
too slow and costly to apply in practice.
Today, 3D seismology is widely used in conjunction with directional drilling and in deepwater extraction operations. These three technologies are highly
complementary. Having precise information about
reservoir shape and location is less valuable if the
technology is not available to enter a reserve from the
optimal angle. This entry is precisely what directional
drilling allows. Similarly, deepwater drilling is an
extremely expensive process. It would not be economical were it not possible to obtain surveys sufficiently
accurate to ensure a high probability of success, which
3D seismology allows.
Complementary innovations have had reinforcing
and enabling effects in all of the industries that we
have studied. Plantation forests, which are themselves
innovations, are profiting from biotechnological breakthroughs and from techniques first developed for
agricultural crops and animal husbandry. As forestland
is more and more at a premium, investments in genet-
M O T H E R N AT U R E N E C E S S I TAT E S I N V E N T I O N
ically improved trees are paying off. Selective breeding
for commercial attributes like superior growth and
quality is becoming more common. The adverse
consequences of selection for such attributes can be
offset by the use of pesticides and fertilizers, as well as
irrigation and preharvest thinning.
In the coal industry, the advantage of “longwall”
mining to more effectively exploit thinner and deeper
seams increased in lockstep with improvements in the
power and positioning technologies for deploying it.
In fact, the advent of ever larger and more powerful
machinery—including trucks the size of small buildings—has enhanced coal productivity overall. These
developments depended on a host of mechanical
improvements.
Of course, sometimes an industry’s technology
does advance piecemeal. Although the history of oil
and gas exploration is an incremental one built on
adaptation of outside technologies, it is also episodic:
That is, first one technology was developed that could
identify one type of deposit; deposits of that type were
discovered and exploited. Then a second technology
was developed to identify a second type of deposit;
deposits of the second type were discovered and
exploited; and so on.
But close inspection of industry histories suggests
that episodic evolution is the exception that proves
the rule. The clear evidence of all the case studies is
that even major innovations are accompanied by
ancillary developments that enhance their efficiency
and broaden their applicability.
Competition
By and large, the case studies support the view that competition begets
innovation. The study of coal provides ample evidence that a period in
which regulatory considerations generated greater competition
between producers was also one in which tremendous technological
strides were made.
Being denied protection from foreign competition in the 1970s
appears to have strengthened the U.S. copper industry. Those firms
that survived were forced to innovate. As a result, the U.S. industry is
arguably more competitive now than many of its foreign rivals, who,
despite their advantage of richer reserves, have not made the same
investments in modernization.
In the 1980s, the U.S. petroleum industry faced a squeeze between
competition from foreign producers and the upward pressure exerted
on costs by the depletion of easily accessible domestic reserves. This
double bind forced development of techniques to exploit known
reserves at competitive costs.
technological leadership tends to persist.
Why do some countries that enjoy an advantage
with respect to their endowments of natural resources
fail to press that advantage by investment? And why,
on the other hand, do some nations with relatively
few resources invest in extraction and grow rich?
Simple theory predicts that the return to capital
investment ought to be higher in areas in which capital stock is low compared with plentiful labor,
resource reserves, and other factors of production. The
A Culture of Innovation
The pressure of circumstances and the spillover benefits from complementary technologies do not provide
a complete explanation of how and why innovation
occurs. As seen in the case studies as well as in general data on world economic development, those
nations and firms that pioneered new technologies in
one period are likely to do so in the next. To some
extent, this tendency might be seen as a consequence
of the factors already cited. If depletion induces innovation, further depletion may induce further innovation. And if the existence of one generation of
technology creates conditions for the birth of another,
the firms and countries that produce the first generation may be better positioned to produce the second.
Innovations do get diffused throughout the world, but
Public Funding
Government ownership of resource stocks might be expected to
reduce incentives for innovation. Nonetheless, public support for
research and development has proven important. The solvent extraction-electrowinning process now used in copper mining was first
employed in mining uranium for military purposes. Byproducts of
publicly funded research related to outer space include global positioning systems used in the coal industry to make extraction and movement of coal more efficient, and satellite communications used to
transfer seismological data from petroleum exploration. Public funding
has also helped advance diffusion. Research at the U.S. Bureau of
Mines helped foster the introduction into this country of longwall
mining technologies pioneered in Britain and Germany.
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basis for this theory is that investment would flow
from the wealthier to the poorer nations of the world.
In fact, it appears that the opposite is often true.
Japan, for example, has relatively few natural
resources but receives a great deal of capital investment, while many richly endowed African nations
receive very little.
A great many explanations for this apparent paradox have been proposed. One common notion is that
capital investment—and, in particular, investment in
high-technology equipment—either creates or attests
to conditions where further investment in high-technology equipment is profitable.
We can only point out that improving technologies
incrementally, borrowing related technologies, and
recombining existing ones to generate innovations are
facilitated by corporate ties and physical proximity.
Even in the absence of these factors, relative openness
with respect to information sharing, as may occur
among firms within and among advanced industrial
countries, seems conducive to innovation.
A more basic consideration yet is that innovators,
if they are to have an incentive to innovate, must have
some confidence that they are going to enjoy the
rewards of success. Many regions blessed with abundant resources lack what may be termed the political,
social, and cultural prerequisites for world-class production. It would be a good thing for both humanitarian and pragmatic reasons if developing nations could
quickly acquire these prerequisites.
To the extent that they do not, however, we can
anticipate that U.S. natural resource industries will
remain competitive in world resource markets despite
the fact that geology and a longer history of depletion
would seem to place them at a cost disadvantage. It is
true that the scale of U.S. production has, in some
instances, declined in absolute terms or relative to
world production. The fact remains, however, that
U.S. firms are able to produce at costs that make them
competitive with foreign rivals. This fact must be
ascribed to an ability to develop and adopt new technologies more readily than many of its competitors.
Like the United States, those firms and nations that
demonstrate a persistent commitment to innovation
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A New Era of Scarcity?
With gasoline prices near historical lows one
might not expect it, but some researchers are
suggesting that a new era of oil shortages is just
around the corner. As Richard Kerr has reported
(Science, 21 August 1998, pp. 1128–1131) these
researchers predict that the end of cheap oil is
coming soon. They argue that since the most
easily accessible petroleum reserves are near
exhaustion, costs of production will begin to rise.
RFF researchers Joel Darmstadter and Michael
Toman challenge this assertion, however, as indicated in their letter of response (Science, 2
October 1998, pp. 47–48). The innovations
documented in Productivity Change in Natural
Resource Industries provide examples of how the
petroleum industry might again deal with difficult
circumstances. Moreover, the issue is not so much
the physical depletion of petroleum reserves as
society’s demand for them. Just as more fuelefficient cars were built in response to the energy
crisis of the 1970s, we might again successfully
substitute efficiency for quantity of energy use and
weather future shortages.
and the development and use of new technologies are
likely to remain profitable even if their new technologies can be copied in a matter of years or even
months. The reason is that successful research and
development have as much to do with continuing
experimentation as they do with specific breakthroughs. Those who are willing to experiment—and
who are blessed by experience, temperament, and,
perhaps, cultural support—may remain industry
leaders for longer periods than their resource endowments suggest.
R. David Simpson is a fellow in RFF’s Energy and Natural Resources Division. This article was adapted from his introduction to the new RFF book Productivity Change in
Natural Resource Industries, which he edited. To order a copy, see page 22.